Dollar lowest vs. euro in three months

Oil price, economic news prompt revisit of Fed forecasts

RachelKoning

CHICAGO (MarketWatch) - The suffering dollar was knocked even lower by a report Thursday that showed U.S. manufacturing growth slowed in August.

The dollar fell broadly, including to a three-month low against the euro, which came late in the trading day, and a more than two-month low against the British pound.

The break of a previously fortified $1.2882 against the euro - the mid-August peak for Europe's shared currency - unleashed dollar stop-loss orders that opened the door to a move above $1.25. The euro hadn't been this high since May 30.

The dollar index, which measures the greenback against a dozen or so world currencies, fell below 86.76, its lowest since late May.

The Institute for Supply Management's index, a closely tracked private-sector gauge that precedes most government data for the same period, fell to 53.6% in August from 56.6% in July.

Rising oil and gasoline prices already had nicked the dollar, with much uncertainty for the U.S. economy and its oil-refining Gulf of Mexico region persisting as horrific reports of the devastation brought by Hurricane Katrina pour in.

The dollar was expected to lose some of its appeal to foreign investors should the expectations of U.S. bond markets hold true. Futures traders at the Chicago Board of Trade have scaled back expectations for the scope of U.S. interest-rate hikes in the final months of the year and early next.

A September hike is still likely, but not the sure-thing priced into financial markets just a few days ago. See related story.

The Fed may have to wrap up, or at least pause, its drive to remove borrowing accomodation in order to help the nation recover from the hurricane's effects, said traders.

Higher interest rates this year had helped the dollar move up from multiyear lows.

The interest-rate differential between the U.S. and the U.K., a full percentage point in favor of the pound, prompted traders to look anew at the British currency.

In late-day trading, the dollar had shed 1.6% against the pound; sterling was changing hands at $1.8327. It earlier hit $1.8366, its highest against the dollar since June 21.

The dollar was down 1.2% against Europe's shared currency, with the euro changing hands at $1.2487. The dollar shed 1.4% to 1.2351 Swiss francs.

The greenback's losses were less pronounced against the yen, although the buck did trade down 0.8% against its Japanese counterpart, to a one-week low of 109.84 yen late in the day.

"High oil prices and slower demand in the U.S. economy are more likely to impact Asia than Europe, which explains why the market has not bought yen as aggressively as the euro," said ABN Analysts in a research note.

The Japanese economy is also seen as particularly vulnerable to weakening consumer spending tied to lofty energy prices. Although, analysts said earlier this week the risks brought by high oil prices could become more and more a global economic stress, which may make the dollar attractive relative to its industrial counterparts.

Crude-oil futures edged higher as traders viewed a White House decision to release oil from strategic reserves as only a short-term fix to the nation's oil-supply constraints.

October unleaded gasoline lead the pack, up 15.37 cents, or 6.8%, to close at $2.409 a gallon. October crude closed at $69.47 a barrel, up 53 cents. See Futures Movers.

Factory gauge cools

The ISM report decline was unexpected. The consensus forecast of estimates collected by Marketwatch was for the index to rise to 57.2%. Readings above 50 indicate expansion.

New orders slipped to 56.4% in August from 60.6% in July. The employment index fell to 52.6% from 53.2%. The price index spikes to 62.5%, the highest level since April. See Economic Report.

The dollar's woes were only aggravated by a report that showed first-time jobless benefits applications for the latest week by 3,000 to 320,000.

The number was higher than economists expected. The four-week average of jobless claims was up by 1,250 to a still relatively low 316,750.

Also reported, U.S. personal incomes increased 0.3% in July, while spending soared ahead by 1%. Both readings were in line with forecasts.

The focus on the Hurricane Katrina aftermath and oil-market developments largely overshadowed European economic news and more positive campaign developments for Japanese Prime Minister Junichiro Koizumi, whose reelection on Sept. 11 would be generally viewed as yen-positive.

ECB seen on hold

The case for a firmer euro was helped by monetary policy developments there.

The European Central Bank kept its benchmark interest rate unchanged at 2%, as was widely expected. But with recent increases in business confidence surveys signaling a possible pick-up in the 12-member euro zone in the third quarter, most economists no longer expect any rate cuts this year.

The ECB has returned more hawkish from the summer break, with central bankers apparently more nervous about the possible build up of inflationary pressures," said Natascha Gewaltig, analyst with Action Economics.

"However, with growth risks still tilted to the downside, especially given the impact of high oil prices on world growth, we continue to see the ECB on hold for the remainder of the year."

The ECB has not moved interest rates since June 2003.

The bank now sees euro-area GDP between 1% and 1.6% in 2005 and between 1.3% and 2.3% in 2006.

The Reuters euro-area purchasing managers report for August declined to 50.4, dragged lower by a disappointing reading for Germany's purchasing gauge, which fell to a two-year-low 48.7 from 49.8.

The U.K.'s nationwide house price report came in softer than expected. A 2.3% year-over-year annual growth rate was the lowest in nine years.

And in Japan, Koizumi reportedly said Thursday that he has been receiving a positive response to his reform message on the campaign trail.

He said he thinks upcoming election will allow him to pass the postal savings reform bill that failed last month in parliament, but repeated a pledge to step down if his ruling Liberal Democrat Party loses its majority, said the ABN Amro analysts.

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